Soaring home prices in Australia spur calls for stricter lending curbs

House prices have risen at more than 10 times the pace of wages

A seagull flies over the Sydney Harbour Bridge and the residential properties line the Sydney suburb of Birchgrove in Australia, August 16, 2017.  REUTERS/Steven Saphore

The unrelenting surge in Australia’s home prices – rising by hundreds of dollars a day in Sydney and Melbourne – is fuelling momentum for macroprudential measures to contain credit growth and keep a lid on swelling financial risks.

Driving the gains are record-low official interest rates, which Reserve Bank of Australia governor Philip Lowe is expected to hold at 0.1 per cent at the October 5 meeting. While Mr Lowe cut weekly bond purchases to A$4 billion ($2.9 billion) last month, the RBA consistently said it does not expect to raise interest rates until 2024 at the earliest.

That leaves tighter lending rules as the only way to rein in the property market, which is increasingly unaffordable for regular workers in major cities.

They [the government] seem to be homing in on high debt-to-income loans
Felicity Emmett, senior economist, Australia & New Zealand Banking Group

Citing concerns over financial stability, the International Monetary Fund called last week for lending curbs to tame the red-hot prices.

The central bank said it is constantly assessing tools, but has held back until now as it focused on supporting the economy with the coronavirus leaving much of the population-heavy east coast in lockdown.

The government, which must go to the polls by May, also seemingly wants action on house prices.

“They do seem to be homing in on high debt-to-income loans,” said Felicity Emmett, a senior economist at Australia & New Zealand Banking Group in Sydney. “On balance, it’s more likely to happen before the end of the year.”

Housing is roaring in response to ultra-low rates, a phenomenon seen across the developed world as central banks eased policy to support economies during the pandemic.

Prices in Australia have risen at more than 10 times the pace of wages, putting up a major barrier to entry for first-home buyers.

The rapid house price gains in Sydney and Melbourne come despite protracted lockdowns and as growing household debt raises financial stability issues.

The RBA ruled out tightening policy to cool asset prices – unlike South Korea, and as New Zealand’s central bank appears set to do at its October 6 meeting – focusing instead on pushing the economy to full employment.

Australian housing data for September released on Friday showed prices climbed 17.6 per cent in the first nine months of this year.

The RBA does not control macroprudential tools directly. Rather, they fall under the remit of the banking regulator, which is in regular discussions with the central bank.

Updated: October 2nd 2021, 4:30 AM